In my daily life I do dabble a bit in the stock market, some successes, some failure, but more good than bad usually. I won't pretend to be an expert by any means when it comes to the market, but there are some trends that seem to be a red flag to me with the way American Airlines management has been handling stock vs outstanding debt.
As fuel prices have fallen and stayed quite low over the past year or so, profits have increased across the board for all airlines. Combine this with record high passenger numbers across the industry and you have a recipe for huge profits that have never been seen before in the industry. With all this extra money, American Airlines has announced stock buyback after stock buyback, even accelerating buyback dates. This is done for a number of reasons that ultimately lead to an attempt to better financial number and often increasing stock prices.
While this is usually a good thing from an investors point of view, we have to keep in mind that this profit could be used elsewhere. Airplanes cost a lot of money, hundreds of millions of dollars a piece for the largest commercial aircraft. American Airlines has been adding a lot of new planes, and as such is carrying a significant amount of debt from that aspect of the business. So is it a mistake to spend all of your money on stock buybacks while carrying a huge debt? It an interesting question.
It does seem that American Airlines should be far more sensitive to such an issue seeing as it was not too long ago that the airline emerged from bankruptcy. It does seem that carrying a huge burden would be a bad decision, however, the CEO doesn't see it that way. From his perspective he claims that the buyback is a better investment since the carried debt is a lower burden... not sure how that works, but this does seem to be the way more and more people and businesses operate now.
While I am not a financial analyst by any means, but carrying $20 billion in debts at the end of 2015, and spending more on buybacks than you are making is not a good recipe from any logical sense that I can figure.
Recently American Airlines stock dropped on good earnings number for one simple fact, people are worried airlines will become overconfident with these profits. They seem to be worrying that the company will not plan for the future and looking at these moves, maybe the stock holders and analysts aren't wrong, $20 billion in debts is a lot of money that should probably be paid down sooner rather than later. I may not know a ton about the stock market, but the share price of American has fallen quite a bit over April, so I must not be the only one that feels this way.
Lets keep an eye on this aspect of American Airlines and see what happens.
Rocket Scientist, Travel Junkie, and Ruler of the 4th Moon of Omicron Persei 8